The U.S. economy has hit a slow patch. That's the message being sent by the latest economic data. Starting with the weak September jobs report that came out earlier this month, a number of economic releases have disappointed to the downside.
Today's retail sales figures were a case in point. According to the U.S. Commerce Department, sales increased by only 0.1 percent in September, below the expected 0.2 percent gain. Worse, the figure from August was revised lower to show zero change, down from an increase of 0.2 percent.
Separately, the Bureau of Labor Statistics reported that producer prices in the U.S. plunged 0.5 percent in September. Even stripping out volatile food and energy, prices sagged by 0.3 percent. On a year-over-year basis, the headline PPI was down by 1.1 percent, while the core PPI was up a mere 0.8 percent.
The latest data are sure to dampen economists' third-quarter economic growth estimates. A real-time GDP tracker from the Atlanta Fed suggests that the economy only expanded at a 1 percent annualized rate in the third quarter, well below the current consensus estimate of 2.5 percent.
Rate Hike Odds Decline
Weak growth and low inflation have raised skepticism about whether the Federal Reserve can go ahead and hike rates this year. Fed officials have been itching to raise the benchmark overnight interest rate from its current levels near zero, where it's been since the 2008 financial crisis.
Yet, at least based on the latest data, it seems increasingly unlikely that will happen.
Fed funds futures currently suggest there is only a 31 percent probability that the central bank will hike at its December meeting. The same Fed funds futures indicate an even chance of a hike at the March 2016 meeting, but the probability of a move doesn't materially increase until the July meeting (70 percent chance).
Bonds & Gold Rally
With rates poised to stay lower for longer, government bond prices rallied. The U.S. 10-year bond jumped, sending its yield briefly below 2 percent today. At the same time, the 30-year yield dipped to about 2.85 percent.
ETFs tied to Treasury bonds like the iShares 20+ Year Treasury Bond ETF (TLT | A-85) likewise climbed. TLT is now up 0.4 percent year-to-date on a total return basis, having been down as much as 7.5 percent in June.
Another beneficiary of the lower-for-longer theme is gold. The yellow metal, which is considered a safe haven by some, bounced back from a low of $1,072/oz in July to $1,178 as of this writing.
The SPDR Gold Trust (GLD | A-100) is now only fractionally lower for the year. Indeed, the charts for GLD and TLT look awfully similar, as both got hammered amid expectations of rising rates in the summer, only to recover recently as those expectations diminished.
YTD Returns For TLT, GLD
In contrast to bonds and gold, which have jumped on the prospect of a delayed rate hike, the U.S. dollar has gone the other way. The U.S. Dollar Index sagged to 94.22, putting it near the bottom of this year's trading range.
The PowerShares DB US Dollar Index Bullish ETF (UUP | B-73) is still up for the year, but well off its highs.
YTD Return For UUP
That said, the dollar's retreat has repercussions beyond just UUP.
For one, it takes some pressure off emerging market currencies, which fell precipitously throughout the year. That's a positive for those economies and an ETF like the Vanguard FTSE Emerging Markets ETF (VWO | C-89).
A lower greenback also aids U.S. corporations, by making exporters in the country more competitive and increasing the value of foreign sales.
From a tactical perspective, the dollar's moves may have an impact on investors' decision on whether to hedge currency risk.
Currency-hedged products like the WisdomTree Japan Hedged Equity ETF (DXJ | B-67) and the WisdomTree Europe Hedged Equity ETF (HEDJ | B-51) have been extremely popular in recent years on the back of the idea that the dollar will continue to strengthen against rival currencies.
If the dollar trade is truly reversing, these ETFs won't be as attractive compared with unhedged ETFs, which will outperform as the dollar weakens.
Contact Sumit Roy @ [email protected].